One of the great things about trading markets as opposed to investing in them is that you get the chance to give in to your "inner bear" every now and then. But sometimes what you see is scary enough to send even the most grizzled grizzly bear scurrying for the safety of his or her cave.
I spent some time dialing through the Nasdaq 100 this morning, looking for stocks that were under their 200-day moving averages. I was particularly looking for overbought stocks, stocks with Relative Strength Index (RSI) values of 98 or more. The chartist in me loves to look at chart after chart after chart consecutively sometimes, a 100 or more charts at a time. It's like seeing a neighborhood through its back roads and side streets rather than its avenues and boulevards. It can be a great way for a visually-oriented person to get the gestalt of the stock world.
I tell you this: Life under the 200-day moving average looks like something out of Dante's Inferno. It is not a pretty place.
Sure, every now and then I saw a stock emerge from the cold, the mud and freezing rain, on up to higher ground. But more often that not it was every bit the dark, hopeless place traders have been warned about.
And focusing not just on those stocks that were in this dark place below the 200-day moving average, but specifically on those stocks that were overbought, showing atypical short-term strength, was all the more worth watching. Over and over again these stocks would rally, sometimes explosively, only to have them stall like model rockets and come crashing back down.
Stocks as weak as these, stocks that are showing exceptional strength in the short-term, do not necessarily show up every day.
Their behavior IS unusual, which is what makes them an edge worth exploiting. Not only does this technique of selling or shorting weak stocks exhibiting temporary strength provide an excellent edge in the short term. This approach to trading is consistent with what we all know is the proper attitude to have toward the markets: buying low and selling high.
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for a primer on trading with the 2-period Relative Strength Index.
As befits my earlier reference to Dante's Inferno, there are nine stocks as of the last close that are trading below their 200-day moving averages and have Relative Strength Index values of 98 or more.
These stocks all have PowerRatings (for Traders) of 3 and are among the candidates traders looking for stocks to bet against should consider.
The stocks are listed in order of highest 100-day historical volatility (H.V.). Historical volatility is an underrated parameter and one that is a key component in many of our trading and investing strategies here at TradingMarkets.
Vail Resorts Inc. (MTN | news | PowerRating | PR Charts ). H.V. 33.85
NICE-Systems Ltd. ADR (NICE | news | PowerRating | PR Charts ). H.V. 32.34
Pride International (PDE | news | PowerRating | PR Charts ). H.V. 31.84
CRA International (CRAI | news | PowerRating | PR Charts ). H.V. 31.53
AEGON Nv (AEG | news | PowerRating | PR Charts ). H.V. 29.81
Talisman Energy (TLM | news | PowerRating | PR Charts ). H.V. 29.61
CBS Corp Class B (CBS | news | PowerRating | PR Charts ). H.V. 27.37
Energy Transfer Partnership Lp (ETP | news | PowerRating | PR Charts ). H.V. 27.05
Targa Resources Partners Units (NGLS | news | PowerRating | PR Charts ). H.V. 26.79
David Penn is Senior Editor at TradingMarkets.com
